June 19, 2008

Payout Threatens Milk Cost

-------------------- Consumers could be facing another rise in the price of milk while dairy farmers are creaming it.

Fonterra will give no guarantee it will not raise the price of milk after boosting the dairy farmers' payout yesterday to $7.90 a kilogram of milksolids for the 2007-08 season.

This dairy season will go down in history as the record payout puts another $4 billion in the pockets of 11,000 dairy farmers.

Last year they were paid a paltry, by comparison, $4.46kg.

Soaring international dairy prices in the past year are responsible for the windfall.

Peter McClure, managing director of Fonterra Brands, said: "I can't rule out any increases in milk. Butter and cheese won't go any further just now."

Butter and cheese were already high and not expected to go much higher, he said.

Fonterra Brands, the domestic processing and packaging business of Fonterra, had to buy the raw milk, bulk butter and cheese from Fonterra at internationally linked prices.

If it did not, Fonterra would sell the dairy products on the world market, McClure said.

Last time Fonterra raised the farmer payout forecast - in April from $6.90 to $7.30 - it raised its wholesale prices to Fonterra Brands and other processors.

But McClure said Fonterra Brands had not passed that on because of consumers' "screaming" and fierce competition from its rival, Meadowfresh, owned by Goodman Fielder.

Fonterra Brands' profit margins had fallen 25 per cent but he did not want to see a decline in milk consumption.

McClure said he had to make a call on several factors - the company's costs, consumer resistance to rises and less buying of dairy products - and weigh up a price rise or the size of one or not.

"Naturally enough, I want to recover cost increases," he said.

Asked why Fonterra had to charge its own company for the products in the first place, McClure said Fonterra had to get a profit on the processing assets in which it had invested.

Fonterra Brands further processed the products fit for the consumer.

Fonterra sold to other processors and it would be seen as anti- competitive if it sold more cheaply to its own processing company.

Meadowfresh has about 50% of New Zealand dairy sales and Fonterra Brands the other half.

Fonterra's wholesale prices would rise after this final forecast of $7.90 but they could go down again in the New Year. That was because next year's payout is forecast to be $7 a kg.

McClure said he would weigh up all of that in his next price decisions.

Dairy Farmers of New Zealand chairman Frank Brenmuhl said if Fonterra reduced its prices to New Zealanders, it would be dairy farmers subsiding milk for New Zealand consumers.

That was the role of the Government, he said.

Fonterra did not need to sell any milk in New Zealand as there was enough demand internationally to sell it all.

Milk prices were internationally set, like oil prices, Brenmuhl said.

He said a booming dairy industry was good for the country, providing jobs and income.

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INSIDE

Economy boost A5

Irrigation costs A5

A2 alternative A5

Future cloudy E3

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Fonterra farmers are to receive an average payout of $790,000 this season, after the co-operative boosted its forecast to a record $7.90/kg milksolids. Of that forecast, 30c is expected to come in September.